A perfect match: Coupling tax fairness with job creation for a stronger economy

Issue Brief #329

The tax code has been fundamentally changed in the last few decades in ways favoring wealthy and high-income households (Pollack and Thiess 2011). The top marginal tax rate has fallen from 70 percent during the 1970s to 50 percent through most of the 1980s to 35 percent for the past decade. The tax rate on capital gains—income created from wealth rather than work—has fallen from 40 percent in the late 1970s to just 15 percent today. These preferential rates on unearned income undermine the principle of tax fairness that effective tax rates should rise with income, allowing Warren Buffett and Mitt Romney, for example, to pay a smaller share of their income in taxes than many middle-class households pay (Pollack 2012). Tax reform that closes tax breaks for and raises rates on high-income individuals is good policy because it shifts the distribution of taxes back toward those best able to shoulder the burden.

But that’s not the only benefit these tax policies would provide. They would also raise revenue, and at a time when the economy remains weak we can use this revenue to create jobs.

Over the past two years, Congress has largely ignored or paid scant attention to job creation and has instead directed its rhetoric, if not its actions, toward the budget deficit. This debate is more than just a distraction, it is also counterproductive: The economic policies we need to alleviate the ongoing jobs crisis—increased social safety net benefits, low-income tax credits, infrastructure investment, aid to states, etc.—generally result in higher deficits, at least in the short run. This is, in fact, exactly what we should do: Invest more in job creation, and finance the cost through additional borrowing.

But a misplaced opposition to higher near-term deficits need not preclude effective job creation policies, because Congress could simply use tax fairness reforms to pay for job creation policies. This combination has a number of virtues. First, tax increases on high-income households create very little drag on near-term economic growth. Because these households save a high share of each marginal dollar they receive, a high-income individual facing a tax increase will reduce his or her consumption in response, but by less than a lower- or middle-income earner facing the same tax increase. Second, by pairing job creation policies—which are temporary—with permanent tax changes, deficits would be reduced substantially over the medium and long term (which is what really matters). And finally, moving back toward full employment and increasing taxes on higher-income earners both push against the income inequality trends of the last few decades. (High unemployment also hurts employed lower- and middle-income workers because slack in the labor market reduces their ability to negotiate the real wage increases needed to keep inequality from growing.)

Progressive taxes to raise revenue

The Congressional Progressive Caucus’s Budget for All—which the EPI Policy Center helped develop and analyze—includes a number of tax policies that raise revenue while having only a minimal impact on the economy in the near term (Fieldhouse and Thiess 2012). This analysis examines the impact of four such policies that could be implemented in a way to promote job creation.

Cap the value of deductions at 28 percent: Itemized deductions and other tax expenditures that reduce taxable income are regressive because their value—which is equal to a filer’s marginal tax rate—rises with income. By capping the value of deductions at 28 percent, taxpayers with over $200,000 of income will still be able to take all the itemized deductions they want, but the value of their deductions will be no greater than the value enjoyed by middle-class taxpayers. This policy change would generate $333 billion in revenue over the next decade (see Table 1).

Table 1

Table 1 (continued)

Job impact of implementing various tax policies and spending the revenue on infrastructure (revenue in billions of dollars)

2013

2014

2015

2016*

2017*

2013–2017

2013–2022

1. Cap deductions at 28%

Revenue

$20

$25

$28

$30

$33

$136

$333

Job impact

163,720

195,686

201,746

207,810

213,815

2. Fairness in taxation/equalization

Revenue

$78

$121

$133

$142

$151

$624

$1,511

Job impact

631,952

933,968

966,194

973,245

980,619

3. Obama international corporate tax package

Revenue

$7

$15

$16

$17

$18

$73

$168

Job impact

58,258

120,907

124,483

123,135

121,734

4. Financial transactions tax

Revenue

$55

$76

$79

$82

$86

$378

$849

Job impact

433,649

577,157

566,267

555,572

546,717

Total job impact

1,287,579

1,827,718

1,858,690

1,859,762

1,862,885

*Assuming economy remains below full employment

Source: Author's analysis of data from Citizens for Tax Justice (2008), the Budget for All (Fieldhouse and Thiess 2012), and Bureau of Labor Statistics (2012)

Raise tax rates on high earners: Not only has the top income tax rate been cut in half over the last 30 years, but also our tax system does a poor job of differentiating between high-income and really high-income individuals. All income above $380,000 is taxed at the same marginal rate, whereas the cutoff for the top marginal tax rate was roughly $3 million in the 1950s and $1 million in the 1970s (adjusted to current dollars). The policy proposed by the CPC incorporates President Obama’s proposal to allow the top two brackets to revert to their Clinton-era levels as well as Rep. Jan Schakowsky’s (D-Ill.) Fairness in Taxation Act (FTA), which would adopt five additional brackets, ranging from 45 percent for taxable incomes above $1 million to 49 percent for incomes above $1 billion. The FTA would also eliminate the preferential tax rates on capital gains and dividends. Overall, these proposals would generate roughly $1.5 trillion in revenue over the next decade.

Close corporate loopholes: The corporate income tax code contains tax loopholes and preferences that result in low revenues relative to historical levels, opportunities for tax evasion, and perverse incentives for overleveraging, offshoring, and using fossil fuels. Citizens for Tax Justice looked at 280 Fortune 500 corporations with combined pretax profits of $160 billion and found that 26 of them paid no income taxes in any of the last four years (Citizens for Tax Justice 2012). Adopting the reforms to the U.S. international tax system proposed in President Obama’s fiscal year 2013 budget—reforms that largely target international corporate tax avoidance—would raise $168 billion over the next decade.

Adopt financial transactions tax (FTT): The general purpose of the financial sector in the economy is to allocate capital and risk in a way that allows individuals and businesses to grow and prosper. In this way, the financial sector is only an intermediary, a sector that facilitates the growth of the rest of the economy but does not produce growth itself. Over the last 30 years, the financial sector has grown from 3.8 percent to 7.6 percent of the economy, yet this growth does not seem to have provided any commensurate benefits to the overall economy—if anything, the economy has underperformed during these 30 years compared with the three decades prior (Mishel and Bivens 2011). These trends suggest that much of the financial sector’s recent growth produces profits for itself without adding actual value to the economy or society. By levying a small tax on the sales of financial products, large sums of revenue can be raised in a progressive manner while dampening volatility and without distorting productive economic activity. The Congressional Progressive Caucus’s version of the FTT would raise $849 billion over the next decade.

Jobs impact of investing the new revenue

The potential jobs impact of moving toward a fairer and more progressive tax system, as described above, and dedicating the near-term proceeds to infrastructure investment or another form of economic stimulus with a similar economic impact is substantial.

Using standard macroeconomic modeling consistent with private- and public-sector projections, we estimate that fiscal support financed with these progressive tax provisions would boost employment by nearly 1.3 million jobs in 2013 and by over 1.8 million jobs in each year during 2014–2017. Table 1 summarizes the jobs impact for each year through 2017, and Tables 2–5 detail the state-by-state job impacts.

Table 2

Table 2 (continued)

Capping deductions for high-income taxpayers and spending on infrastructure, job impact by state

2013

2014

2015

2016*

2017*

Total

163,720

195,686

201,746

207,810

213,815

Alabama

2,654

3,173

3,271

3,369

3,467

Alaska

431

515

531

547

563

Arizona

2,886

3,450

3,556

3,663

3,769

Arkansas

1,647

1,969

2,030

2,091

2,151

California

13,932

16,652

17,168

17,684

18,195

Colorado

2,778

3,320

3,423

3,526

3,628

Connecticut

1,485

1,774

1,829

1,884

1,939

Delaware

547

654

674

694

714

District of Columbia

1,038

1,241

1,279

1,318

1,356

Florida

8,534

10,200

10,516

10,832

11,145

Georgia

5,016

5,995

6,181

6,367

6,551

Hawaii

777

929

957

986

1,015

Idaho

834

997

1,028

1,059

1,090

Illinois

6,893

8,239

8,494

8,749

9,002

Indiana

4,047

4,837

4,987

5,137

5,285

Iowa

2,184

2,611

2,692

2,773

2,853

Kansas

1,836

2,195

2,263

2,331

2,398

Kentucky

2,586

3,091

3,187

3,283

3,378

Louisiana

2,710

3,239

3,340

3,440

3,539

Maine

838

1,002

1,033

1,064

1,094

Maryland

2,739

3,274

3,375

3,477

3,577

Massachusetts

3,579

4,278

4,410

4,543

4,674

Michigan

5,218

6,237

6,431

6,624

6,815

Minnesota

3,391

4,053

4,178

4,304

4,428

Mississippi

1,555

1,858

1,916

1,974

2,031

Missouri

3,693

4,414

4,550

4,687

4,822

Montana

614

734

757

780

802

Nebraska

1,360

1,625

1,675

1,726

1,776

Nevada

1,376

1,644

1,695

1,746

1,796

New Hampshire

770

921

949

978

1,006

New Jersey

3,655

4,368

4,503

4,639

4,773

New Mexico

1,131

1,352

1,394

1,436

1,477

New York

10,067

12,033

12,406

12,778

13,148

North Carolina

5,286

6,318

6,513

6,709

6,903

North Dakota

610

729

752

774

797

Ohio

7,125

8,517

8,780

9,044

9,306

Oklahoma

2,227

2,662

2,745

2,827

2,909

Oregon

2,190

2,618

2,699

2,780

2,860

Pennsylvania

7,584

9,065

9,345

9,626

9,904

Rhode Island

591

707

729

751

772

South Carolina

2,587

3,092

3,188

3,283

3,378

South Dakota

604

722

744

767

789

Tennessee

3,699

4,421

4,558

4,695

4,830

Texas

13,293

15,888

16,380

16,872

17,360

Utah

1,682

2,010

2,072

2,135

2,196

Vermont

405

484

499

514

529

Virginia

4,234

5,060

5,217

5,374

5,529

Washington

3,448

4,121

4,249

4,377

4,503

West Virginia

1,127

1,348

1,389

1,431

1,472

Wisconsin

3,834

4,582

4,724

4,866

5,007

Wyoming

392

469

483

498

512

*Assuming economy remains below full employment

Source: Author's analysis of data from Citizens for Tax Justice (2008), the Budget for All (Fieldhouse and Thiess 2012), and Bureau of Labor Statistics (2012)

Table 3

Table 3 (continued)

Raising rates on high-income taxpayers and spending on infrastructure, job impact by state

2013

2014

2015

2016*

2017*

Total

631,952

933,968

966,194

973,245

980,619

Alabama

10,246

15,143

15,665

15,779

15,899

Alaska

1,663

2,458

2,543

2,561

2,581

Arizona

11,140

16,464

17,032

17,156

17,286

Arkansas

6,359

9,398

9,722

9,793

9,867

California

53,776

79,476

82,219

82,819

83,446

Colorado

10,723

15,848

16,395

16,514

16,640

Connecticut

5,731

8,469

8,761

8,825

8,892

Delaware

2,111

3,119

3,227

3,251

3,275

District of Columbia

4,008

5,923

6,127

6,172

6,219

Florida

32,939

48,682

50,361

50,729

51,113

Georgia

19,362

28,615

29,602

29,818

30,044

Hawaii

2,999

4,432

4,585

4,618

4,653

Idaho

3,221

4,760

4,925

4,961

4,998

Illinois

26,606

39,321

40,677

40,974

41,285

Indiana

15,622

23,087

23,884

24,058

24,240

Iowa

8,432

12,462

12,892

12,986

13,084

Kansas

7,089

10,476

10,838

10,917

11,000

Kentucky

9,984

14,755

15,264

15,375

15,492

Louisiana

10,461

15,461

15,994

16,111

16,233

Maine

3,235

4,780

4,945

4,981

5,019

Maryland

10,573

15,626

16,165

16,283

16,407

Massachusetts

13,814

20,416

21,121

21,275

21,436

Michigan

20,143

29,770

30,797

31,021

31,256

Minnesota

13,088

19,343

20,010

20,156

20,309

Mississippi

6,002

8,870

9,176

9,243

9,313

Missouri

14,253

21,065

21,792

21,951

22,117

Montana

2,371

3,505

3,626

3,652

3,680

Nebraska

5,248

7,756

8,023

8,082

8,143

Nevada

5,310

7,847

8,118

8,177

8,239

New Hampshire

2,974

4,395

4,546

4,579

4,614

New Jersey

14,106

20,848

21,567

21,725

21,889

New Mexico

4,367

6,453

6,676

6,725

6,776

New York

38,859

57,431

59,412

59,846

60,299

North Carolina

20,403

30,154

31,194

31,422

31,660

North Dakota

2,355

3,480

3,600

3,626

3,654

Ohio

27,504

40,648

42,051

42,358

42,679

Oklahoma

8,598

12,707

13,145

13,241

13,342

Oregon

8,454

12,494

12,925

13,020

13,118

Pennsylvania

29,273

43,263

44,756

45,083

45,424

Rhode Island

2,283

3,374

3,491

3,516

3,543

South Carolina

9,985

14,757

15,266

15,378

15,494

South Dakota

2,331

3,445

3,564

3,590

3,617

Tennessee

14,277

21,099

21,827

21,987

22,153

Texas

51,309

75,829

78,446

79,018

79,617

Utah

6,491

9,594

9,925

9,997

10,073

Vermont

1,563

2,309

2,389

2,407

2,425

Virginia

16,341

24,151

24,984

25,166

25,357

Washington

13,310

19,670

20,349

20,498

20,653

West Virginia

4,352

6,432

6,653

6,702

6,753

Wisconsin

14,799

21,871

22,626

22,791

22,964

Wyoming

1,514

2,238

2,315

2,332

2,349

*Assuming economy remains below full employment

Source:Author's analysis of data from Citizens for Tax Justice (2008), the Budget for All (Fieldhouse and Thiess 2012), and Bureau of Labor Statistics (2012)

Table 4

Table 4 (continued)

Closing international corporate tax loopholes and spending on infrastructure, job impact by state

2013

2014

2015

2016*

2017*

Total

58,258

120,907

124,483

123,135

121,734

Alabama

924

1,918

1,975

1,954

1,931

Alaska

152

315

325

321

318

Arizona

1,034

2,146

2,209

2,185

2,160

Arkansas

574

1,191

1,226

1,213

1,199

California

5,180

10,751

11,069

10,949

10,825

Colorado

991

2,056

2,117

2,094

2,070

Connecticut

562

1,166

1,200

1,187

1,174

Delaware

193

400

412

408

403

District of Columbia

361

750

772

764

755

Florida

3,070

6,370

6,559

6,488

6,414

Georgia

1,774

3,681

3,790

3,749

3,707

Hawaii

274

569

586

579

573

Idaho

292

606

624

617

610

Illinois

2,463

5,112

5,263

5,206

5,147

Indiana

1,408

2,922

3,009

2,976

2,942

Iowa

756

1,569

1,616

1,598

1,580

Kansas

643

1,334

1,374

1,359

1,343

Kentucky

899

1,865

1,920

1,899

1,877

Louisiana

945

1,960

2,018

1,996

1,974

Maine

292

606

624

617

610

Maryland

1,002

2,079

2,140

2,117

2,093

Massachusetts

1,300

2,697

2,777

2,747

2,715

Michigan

1,838

3,814

3,927

3,884

3,840

Minnesota

1,203

2,497

2,571

2,543

2,514

Mississippi

541

1,123

1,156

1,144

1,131

Missouri

1,290

2,677

2,756

2,726

2,695

Montana

213

443

456

451

446

Nebraska

472

981

1,010

999

987

Nevada

491

1,019

1,050

1,038

1,026

New Hampshire

275

570

587

581

574

New Jersey

1,372

2,846

2,931

2,899

2,866

New Mexico

395

819

843

834

824

New York

3,629

7,531

7,754

7,670

7,582

North Carolina

1,856

3,853

3,967

3,924

3,879

North Dakota

210

435

448

443

438

Ohio

2,487

5,161

5,314

5,256

5,196

Oklahoma

774

1,607

1,655

1,637

1,618

Oregon

769

1,595

1,642

1,625

1,606

Pennsylvania

2,668

5,538

5,701

5,640

5,576

Rhode Island

209

435

447

443

437

South Carolina

902

1,872

1,927

1,906

1,884

South Dakota

209

433

446

441

436

Tennessee

1,292

2,682

2,761

2,731

2,700

Texas

4,722

9,799

10,089

9,979

9,866

Utah

588

1,219

1,255

1,242

1,228

Vermont

142

295

304

300

297

Virginia

1,528

3,172

3,266

3,231

3,194

Washington

1,231

2,555

2,631

2,602

2,573

West Virginia

390

809

832

823

814

Wisconsin

1,338

2,777

2,860

2,829

2,796

Wyoming

137

285

293

290

287

*Assuming economy remains below full employment

Source:Author's analysis of data from Citizens for Tax Justice (2008), the Budget for All (Fieldhouse and Thiess 2012), and Bureau of Labor Statistics (2012)

Table 5

Table 5 (continued)

Instituting a financial transactions tax and spending on infrastructure, job impact by state

2013

2014

2015

2016*

2017*

Total

433,649

577,157

566,267

555,572

546,717

Alabama

7,095

9,443

9,265

9,090

8,945

Alaska

1,145

1,525

1,496

1,468

1,444

Arizona

7,622

10,145

9,953

9,765

9,610

Arkansas

4,403

5,860

5,749

5,641

5,551

California

36,193

48,171

47,262

46,369

45,630

Colorado

7,352

9,785

9,600

9,419

9,269

Connecticut

3,826

5,093

4,997

4,902

4,824

Delaware

1,454

1,935

1,898

1,862

1,833

District of Columbia

2,776

3,694

3,625

3,556

3,499

Florida

22,499

29,944

29,379

28,824

28,365

Georgia

13,321

17,730

17,395

17,066

16,794

Hawaii

2,065

2,749

2,697

2,646

2,604

Idaho

2,226

2,962

2,906

2,851

2,806

Illinois

18,224

24,255

23,797

23,348

22,975

Indiana

10,821

14,403

14,131

13,864

13,643

Iowa

5,853

7,790

7,643

7,499

7,379

Kansas

4,898

6,519

6,396

6,275

6,175

Kentucky

6,920

9,210

9,037

8,866

8,725

Louisiana

7,241

9,638

9,456

9,277

9,130

Maine

2,239

2,980

2,924

2,868

2,823

Maryland

7,170

9,542

9,362

9,185

9,039

Massachusetts

9,397

12,506

12,270

12,039

11,847

Michigan

13,883

18,478

18,129

17,787

17,503

Minnesota

8,992

11,968

11,742

11,521

11,337

Mississippi

4,157

5,532

5,428

5,325

5,240

Missouri

9,857

13,119

12,872

12,628

12,427

Montana

1,644

2,187

2,146

2,106

2,072

Nebraska

3,637

4,840

4,749

4,659

4,585

Nevada

3,638

4,842

4,751

4,661

4,587

New Hampshire

2,038

2,713

2,662

2,612

2,570

New Jersey

9,454

12,583

12,345

12,112

11,919

New Mexico

3,022

4,022

3,946

3,871

3,810

New York

26,518

35,294

34,628

33,974

33,433

North Carolina

14,078

18,737

18,384

18,036

17,749

North Dakota

1,639

2,181

2,140

2,100

2,066

Ohio

19,028

25,325

24,847

24,378

23,989

Oklahoma

5,958

7,930

7,780

7,633

7,511

Oregon

5,835

7,766

7,619

7,476

7,356

Pennsylvania

20,184

26,863

26,357

25,859

25,447

Rhode Island

1,570

2,090

2,050

2,012

1,980

South Carolina

6,911

9,198

9,025

8,854

8,713

South Dakota

1,619

2,154

2,114

2,074

2,041

Tennessee

9,873

13,140

12,892

12,649

12,447

Texas

35,235

46,896

46,011

45,142

44,422

Utah

4,489

5,974

5,862

5,751

5,659

Vermont

1,078

1,435

1,408

1,382

1,360

Virginia

11,144

14,831

14,552

14,277

14,049

Washington

9,120

12,138

11,909

11,684

11,498

West Virginia

3,023

4,023

3,948

3,873

3,811

Wisconsin

10,237

13,625

13,368

13,116

12,907

Wyoming

1,046

1,392

1,366

1,340

1,319

*Assuming economy remains below full employment

Source:Author's analysis of data from Citizens for Tax Justice (2008), the Budget for All (Fieldhouse and Thiess 2012), and Bureau of Labor Statistics (2012)

There would be a bonus impact of this investment policy for deficit reduction. The increase in growth and employment from the revenue-financed job creation measures would diminish the budget deficit as more workers pay taxes and less money is spent on automatic stabilizers (e.g., unemployment compensation and food assistance). Every dollar in increased economic activity is associated with roughly a $0.37 improvement in the budget deficit (Bivens and Edwards 2010).

Conclusion

The best economic policy would be job creation without any offsets, because in the near term a higher deficit is a net benefit to the economy. Perhaps the best illustration of this principle is Britain, which two years ago implemented a massive austerity package—and six months later its recovery stalled out. Over the past six quarters the British economy has not only failed to grow, it has contracted and lost jobs and is now back in recession, the first double-dip recession in roughly four decades.

But while increasing the deficit is preferable, it isn’t necessary. Pairing tax fairness reforms with job creation investment accomplishes two goals: It reduces inequality by ensuring progressivity in the tax code, and it makes everyone better off by creating jobs and expanding economic activity. And the extra revenue in the medium term and long term doesn’t hurt.

Appendix: Methodology for calculating jobs impact

The jobs impact of each policy was calculated by applying a multiplier to the fiscal impact in each year. The multipliers used were: investing in infrastructure investment, 1.44; capping deductions at 28 percent, 0.37; raising upper-income tax rates, 0.37; raising corporate tax revenue, 0.32; and adopting financial transactions tax, 0.39. Each of these multipliers are published by Mark Zandi at Moody’s Economy.com (Zandi 2011), although capping deductions and raising upper-income rates options use an average of two multipliers (0.35 for permanently extending the Bush-era tax cuts and 0.39 for permanently extending temporary capital gains and dividends tax cuts). These estimates assume that the economy has not returned to potential output by 2017, which is consistent with CBO projections (CBO 2012); this assumption implies elevated fiscal multipliers.

The state shares of the tax policy changes were calculated using state data on the distribution of taxpayers who make over $200,000, published by Citizens for Tax Justice (2008). The state shares of the infrastructure investments were calculated using each state’s share of national employment (Bureau of Labor Statistics 2012). We did not want to presume a certain state allocation of funds for three reasons: (1) different types of infrastructure would entail different allocations; (2) certain allocations, such as the transportation allocations, are currently being debated and will likely change soon; and (3) for some infrastructure areas, such as school construction, it isn’t clear what formula would be used.

It should be noted that each tax policy is scored against a current policy baseline in which current tax policies—including the Bush tax cuts—are extended. But if all four tax policies are implemented together, there may be interactions that are not captured in this analysis. For example, capping deductions against a baseline of higher marginal rates would bring in much more revenue than against a current policy baseline because, in the former scenario, the value of the deductions would be higher. In this instance, the interaction would cause this analysis to understate the actual aggregate revenue increase—and thus jobs impact—of the proposals.

Pollack, Ethan. 2012. “Romney May Not Like Government, but He Loves Its Tax Subsidies.” Economic Policy Institute Working Economics [blog], January 19. http://www.epi.org/blog/mitt-romney-loves-tax-subsidies/